See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES
General
The accompanying condensed consolidated
financial statements as of June 30, 2019 and for the three and nine month periods ended June 30, 2019 and 2018 are unaudited. These
unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements
of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly,
they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated
financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and nine month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2019. The unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements as of and for the fiscal year ended September 30, 2018 and footnotes thereto
included in the Annual Report on Form 10-K of Applied DNA Sciences, Inc. (the “Company”) originally filed with the
SEC on December 18, 2018 and amended by Amendment No. 1 to Form 10-K filed with the SEC on January 28, 2019 and by Amendment No.
2 to Form 10-K filed with the SEC on April 4, 2019.
The condensed consolidated balance sheet
as of September 30, 2018 contained herein has been derived from the audited consolidated financial statements as of September 30,
2018, but does not include all disclosures required by GAAP.
Business and Basis of Presentation
The Company is principally devoted to developing
and marketing DNA technology solutions in the United States, Europe and Asia. These solutions are used in, among other things,
supply chain security, brand protection and drug and biologic applications. To date, the Company has produced limited recurring
revenues from its products and services and has incurred expenses and has sustained losses. Consequently, its operations are subject
to all the risks inherent in the establishment and development of a biotechnology company.
The unaudited condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, APDN (B.V.I.) Inc., Applied DNA Sciences Europe
Limited, Applied DNA Sciences India Private Limited, and LineaRx, Inc. (“LRx”). Significant inter-company transactions
and balances have been eliminated in consolidation.
Inventories
Inventories, which consist primarily of
raw materials, and finished goods, is stated at the lower of cost or net realizable value, with cost determined by using the first-in,
first-out (FIFO) method.
Revenue Recognition
In May 2014, the
Financial
Accounting Standards Board (“
FASB”) issued accounting standard updates which clarified principles for recognizing
revenue arising from contracts with customers (“ASC 606” or “Topic 606”) and superseded most current revenue
recognition guidance, including industry-specific guidance. The core principle of the revenue standard is that an entity recognizes
revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The new guidance applies a five-step model for revenue measurement
and recognition and also requires increased disclosures including the nature, amount, timing, and uncertainty of revenue and cash
flows related to contracts with clients.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Revenue Recognition
, continued
The Company adopted the new revenue standard
at the beginning of the first quarter of fiscal 2019, using the modified retrospective method of adoption and applied the guidance
to those contracts that were not completed as of September 30, 2018. Comparative financial information for reporting periods beginning
prior to October 1, 2018, has not been restated and continues to be reported under the previous reporting guidance. Under the modified
retrospective method of adoption, the cumulative effect of applying the new standard is recorded at the date of initial application,
with no restatement of the comparative prior periods presented. Based on the evaluation, the Company has identified certain customer
contracts, which will require different recognition under the new guidance. The Company has determined that the revenue under certain
of its research and development contracts should be recognized on an over time basis using the input method as compared to ratably
over the contract term. Also, the shipment to the Company’s cotton customer during fiscal 2018 that included extended payment
terms and was included in deferred revenue as of September 30, 2018, would have met the criteria under the new guidance to be recognized
as revenue upon shipment. The Company has determined that the cumulative adjustment to opening retained earnings in fiscal 2019
was approximately $494,000.
The Company measures
revenue at the amounts that reflect the consideration to which it is expected to be entitled in exchange for transferring control
of goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that
performance obligations to customers are satisfied. The Company’s contracts with customers may include multiple performance
obligations (e.g. taggants, maintenance, authentication services, research and development services, etc.). For such arrangements,
the Company allocates revenues to each performance obligation based on their relative standalone selling price.
Under the new accounting guidance, the
Company recognizes revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration
it expects to receive for those goods or services, including any variable consideration.
Due to the short-term nature of the Company’s
contracts with customers, it has elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental
costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts
with an original expected duration of one year or less.
Impact of Adoption
A summary and discussion of such cumulative
effect adjustment and the impact on current period financial statements of adopting Topic 606 is as follows:
|
|
Three months ended June 30, 2019 (unaudited)
|
|
|
|
prior U.S. GAAP
|
|
|
Topic 606 impact
|
|
|
as reported
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
392,599
|
|
|
$
|
-
|
|
|
$
|
392,599
|
|
Service
|
|
|
1,681,065
|
|
|
|
(20,207
|
)
|
|
|
1,660,858
|
|
Total revenues
|
|
|
2,073,664
|
|
|
|
(20,207
|
)
|
|
|
2,053,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
270,883
|
|
|
|
-
|
|
|
|
270,883
|
|
Loss from operations
|
|
|
(1,411,425
|
)
|
|
|
(20,207
|
)
|
|
|
(1,431,632
|
)
|
|
|
|
|
|
|
Nine months ended June 30, 2019 (unaudited)
|
|
|
|
prior U.S. GAAP
|
|
|
Topic 606 impact
|
|
|
as reported
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,651,928
|
|
|
$
|
(766,192
|
)
|
|
$
|
885,736
|
|
Service
|
|
|
2,914,956
|
|
|
|
(84,445
|
)
|
|
|
2,830,511
|
|
Total revenues
|
|
|
4,566,884
|
|
|
|
(850,637
|
)
|
|
|
3,716,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
564,176
|
|
|
|
(6,668
|
)
|
|
|
557,508
|
|
Loss from operations
|
|
|
(6,416,455
|
)
|
|
|
(843,971
|
)
|
|
|
(7,260,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other current assets
|
|
$
|
551,178
|
|
|
$
|
(6,669
|
)
|
|
$
|
544,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholder's equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
$
|
452,139
|
|
|
$
|
350,446
|
|
|
$
|
802,585
|
|
Accumulated Deficit
|
|
|
(254,921,402
|
)
|
|
|
(350,446
|
)
|
|
|
(255,271,848
|
)
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Revenue Recognition
, continued
Product Revenues and Authentication
Services
The Company’s PCR-produced linear
DNA products, including molecular taggants are manufactured in accordance with contracts with customers. The Company recognizes
revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. These performance
obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all
cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss
is dictated by customary or explicitly stated contract terms. The Company does not consider payment terms a performance obligation
for customers with contractual terms that are one year or less and has elected the practical expedient. Nearly all of the Company’s
sales contracts reflect market pricing at the time the contract is executed, are one year or less, and generally provide for shipment
within 30 to 60 days after the price has been agreed upon with the customer. We invoice customers upon shipment, and our collection
terms range, on average from 30-60 days
The cotton ginning season in the United
States takes place between September and March each year; therefore, revenues from these customer contracts may be seasonal and
recognized primarily during the first and fourth quarters of the Company’s fiscal year.
Authentication
Services
The Company recognizes revenue for authentication
services upon satisfying its promises to services to customers under the terms of its contracts. These performance obligations
are satisfied at the point in time the Company services are complete, which in nearly all cases is when the authentication report
is released to the customer.
Research and
Development Services
The Company records revenue for its research
and development contracts using the over-time revenue recognition model as a customer is invoiced or performance is satisfied.
Revenue is primarily measured using the cost-to-cost method, which the Company believes best depicts the transfer of control to
the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio
of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Revenue Recognition
, continued
Revenues are recorded proportionally as
costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized for the actual costs incurred
during a period until the remaining costs to complete a contract can be estimated. The Company has elected to not disclose the
value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Disaggregation of Revenue
The following table presents revenues disaggregated
by our business operations and timing of revenue recognition:
|
|
Three Month Period Ended:
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Research and development services (over-time)
|
|
$
|
1,608,448
|
|
|
$
|
531,568
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
161,926
|
|
|
|
57,017
|
|
Asset marking
|
|
|
140,562
|
|
|
|
264,437
|
|
Large scale DNA production
|
|
|
142,521
|
|
|
|
163,333
|
|
Total
|
|
$
|
2,053,457
|
|
|
$
|
1,016,355
|
|
|
|
Nine Month Period Ended:
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Research and development services (over-time)
|
|
$
|
2,657,560
|
|
|
$
|
1,230,056
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
406,543
|
|
|
|
265,834
|
|
Asset marking
|
|
|
469,035
|
|
|
|
752,105
|
|
Large scale DNA production
|
|
|
183,109
|
|
|
|
459,983
|
|
Total
|
|
$
|
3,716,247
|
|
|
$
|
2,707,978
|
|
Contract balances
As of June 30,
2019, the Company has entered into contracts with customers for which revenue has not yet been recognized. Consideration received
from a customer prior to revenue recognition is recorded to a contract liability and is recognized as revenue when the Company
satisfies the related performance obligations under the terms of the contract. The Company’s contract liabilities, which
are reported as deferred revenue on the condensed consolidated balance sheet, consist almost entirely of research and development
contracts where consideration has been received and the development services have not yet been fully performed.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Revenue Recognition
, continued
The opening and closing balances of
the Company’s contract balances are as follows:
|
|
Balance sheet classification
|
|
October 1,
2018
|
|
|
June 30,
2019
|
|
|
$
change
|
|
Contract liabilities
|
|
Deferred revenue
|
|
$
|
1,356,502
|
|
|
$
|
802,585
|
|
|
$
|
(553,917
|
)
|
For the three
and nine months ended June 30, 2019, the Company recognized $385,984 and $1,037,708 of revenue that was included in Contract liabilities
as of October 1, 2018.
Use of Estimates
The preparation of the financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. The most complex and subjective estimates include revenue recognition, recoverability
of long-lived assets, including the values assigned to goodwill, intangible assets and property and equipment, fair value calculations
for stock-based compensation, allowance for doubtful accounts and management’s anticipated liquidity. Management reviews
its estimates on a regular basis and the effects of any material revisions are reflected in the condensed consolidated financial
statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.
Income Taxes
The Company recognizes deferred tax liabilities
and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates
the degree to which tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction.
In its interim financial statements, the
Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income Taxes”, whereby the Company
utilizes the expected annual effective tax rate in determining its income tax provisions for the interim periods. That rate differs
from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s net operating loss carryforward
as a result of the historical losses of the Company.
Net Loss Per Share
The Company presents loss per share utilizing
a dual presentation of basic and diluted loss per share. Basic loss per share includes no dilution and has been calculated based
upon the weighted average number of common shares outstanding during the period. Dilutive common stock equivalents consist of shares
issuable upon the exercise of the Company’s stock options and warrants.
For the three and nine month periods ended
June 30, 2019 and 2018, common stock equivalent shares are excluded from the computation of the diluted loss per share as their
effect would be anti-dilutive.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Net Loss Per Share
, continued
Securities that could potentially dilute
basic net income per share in the future were not included in the computation of diluted net loss per share because to do so would
have been anti-dilutive for the three and nine month periods ended June 30, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
16,293,527
|
|
|
|
12,271,686
|
|
Stock options
|
|
|
7,929,446
|
|
|
|
5,223,221
|
|
|
|
|
24,222,973
|
|
|
|
17,494,907
|
|
Stock-Based Compensation
The Company accounts for stock-based compensation
for employees and directors in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their
fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the grant date, based on the fair
value of the award, and are recognized as expense over the employee’s requisite service period (generally the vesting period
of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing
model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company
expenses stock-based compensation by using the straight-line method. In accordance with ASC 718 and, excess tax benefits realized
from the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits and tax
deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit
in the condensed consolidated statements of operations.
The Company accounts for stock-based compensation
awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or
the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines
enumerated in ASU 2018-07.
Concentrations
Financial instruments and related items,
which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables.
The Company places its cash and cash equivalents with high credit quality institutions. At times, such investments may be in excess
of the FDIC insurance limit.
The Company’s revenues earned from
sale of products and services for the three month period ended June 30, 2019 included an aggregate of 55% and 12% from two customers,
respectively. The Company’s revenues earned from sale of products and services for the nine month period ended June 30, 2019
included an aggregate of 37%, 20%, and 11% from three customers, respectively.
The Company’s revenues earned from
sale of products and services for the three month period ended June 30, 2018 included an aggregate of 18%, 23%, 15%, 12% and 15%
from five customers, respectively. The Company’s revenues earned from sale of products and services for the nine month period
ended June 30, 2018 included an aggregate of 26%, 17%, and 16% from three customers, respectively.
Three customers accounted for 52% of the
Company’s accounts receivable at June 30, 2019 and one customer accounted for 82% of the Company’s accounts receivable
at September 30, 2018.
Recent Accounting Pronouncements
In
November 2018, the FASB issued ASU 2018-18,” Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606” (“ASU 2018-18”). The amendments in this update clarify that certain transactions between collaborative
arrangement participants should be accounted for as revenue under Topic 606. ASU 2018-18 is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
The Company is currently assessing the impact of ASU 2018-18 on its condensed consolidated financial statements.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
,
continued
In June 2018, the FASB issued ASU 2018-07,
Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting”, which
addresses aspects of the accounting for nonemployee share-based payment transactions. This pronouncement is effective for annual
reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company early adopted
ASU 2018-07 on October 1, 2018 using the modified retrospective transition approach. The cumulative -effect adjustment to opening
retained earnings was not material.
In July 2017, the FASB issued a two-part
ASU No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests With a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share,
FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU
2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that
now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In May 2017, FASB issued ASU No. 2017-09,
Compensation – “Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”).
,
which
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. This pronouncement is effective for annual reporting periods and interim periods within those annual periods
beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU 2017-09 during the three months ended December
31, 2018 and it did not have a material impact on its condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).
The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. For public entities, the amendments in ASU 2017-04 are effective for interim
and annual reporting periods beginning after December 15, 2019. The Company is currently assessing the impact of ASU 2017-04
on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02, "Leases (Topic 842)." The objective of this update is to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods
and is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the new guidance to determine
the impact it may have on its condensed consolidated financial statements.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE B — LIQUIDITY AND MANAGEMENT’S
PLAN
The Company has recurring net losses, which
have resulted in an accumulated deficit of $255,271,848 as of June 30, 2019. The Company incurred a net loss of $7,398,988 and
incurred negative operating cash flow of $5,085,130 for the nine month period ended June 30, 2019. The Company also had working
capital deficiency of $368,799 and cash and cash equivalents of $507,146 as of June 30, 2019. These factors raise substantial doubt
about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The
ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business
plan, raise capital, and generate revenues. The financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
On July 17, 2019, the Company closed $1.5
million in gross proceeds in secured convertible notes (the “July 2019 Notes”), and simultaneously amended the terms
of its secured convertible notes issued on August 31, 2018 and November 29, 2018 (“the Existing Notes”) to, among other
amendments, reduce the conversion price of the Existing Notes to $0.54 to have the same conversion price of the July 2019 Notes
and to facilitate their conversion into equity. The July 2019 Notes and the Existing Notes have a maturity date of November 28,
2021. Under the terms of the July 2019 Notes, the investor retains the option to make additional investments in the Notes over
the next 90 calendar days. The Company expects to use the net proceeds for general corporate purposes. See “Note E –
Secured Convertible Notes Payable” for more information.
The Company’s current capital resources
include cash and cash equivalents, accounts receivable, and inventories. Historically, the Company has financed its operations
principally from the sale of equity and equity-linked securities.
On January 29, 2019 and January 30, 2019
the Company received written notices from the Listing Qualifications Department of The NASDAQ Stock Market LLC (“Nasdaq”)
notifying it that the Company was not in compliance with the minimum bid price requirement as well as the market value of listed
securities requirement, or the alternative standards of Nasdaq Listing Rule 5550(b)(1) or 5550(b)(3) which require the Company
to have minimum stockholders equity of $2.5 million or for it to have had net income from continuing operations of at least $500,000
in the latest fiscal year or in two of the last three fiscal years. Both notification letters state that the Company has 180 calendar
days, or until July 29, 2019 to regain compliance. There is the possibility for an additional 180-day compliance period for the
minimum bid price compliance violation. However, no additional compliance period is applicable to the market value of listed securities
or alternative standards noncompliance.
On July 30, 2019, the Company, received
written notice from Nasdaq indicating that, based upon the Company’s continued non-compliance with the minimum bid price
and $35 million market value of listed securities requirements, as set forth in Nasdaq Listing Rules 5550(a)(2) and 5550(b)(2),
respectively, as of July 29, 2019, the staff of Nasdaq (the “Staff”) had determined to delist the Company’s securities
(including its common stock, $0.001 par value (“Common Stock”) and listed warrants) from The Nasdaq Capital Market
unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Company
requested a hearing before the Panel, which stays any further action by the Staff at least pending the ultimate conclusion of
the hearing process. During the pendency of the requested hearing before the Panel, the Company’s listed securities will
remain listed on Nasdaq. The hearing is scheduled for September 19, 2019.
The Company is diligently working to evidence
compliance with all applicable requirements for continued listing on The Nasdaq Capital Market and intends to submit a plan to
that effect to the Panel as part of the hearing process; however, there can be no assurance that the Panel will grant the Company’s
request for continued listing on Nasdaq or that the Company will be able to regain compliance with the applicable listing criteria
within the period of time that may be granted by the Panel.
NOTE C — INVENTORIES
Inventories consist of the following:
|
|
June 30,
2019
|
|
|
September 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
225,576
|
|
|
$
|
147,984
|
|
Finished goods
|
|
|
84,170
|
|
|
|
73,385
|
|
Total
|
|
$
|
309,746
|
|
|
$
|
221,369
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE D — ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
are as follows:
|
|
June 30,
2019
|
|
|
September 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts payable
|
|
$
|
839,463
|
|
|
$
|
500,849
|
|
Accrued salaries payable
|
|
|
216,076
|
|
|
|
401,130
|
|
Accrued interest
|
|
|
36,305
|
|
|
|
8,136
|
|
Other accrued expenses
|
|
|
79,328
|
|
|
|
55,052
|
|
Total
|
|
$
|
1,171,172
|
|
|
$
|
965,167
|
|
NOTE E- SECURED CONVERTIBLE NOTES PAYABLE
On August 31, 2018, the Company entered
into a securities purchase agreement (the “Purchase Agreement”) with accredited investors and certain members of its
management team and Board of Directors (the “Purchasers”), pursuant to which the Company issued and sold an aggregate
of $1,650,000 in principal amount of secured convertible notes (the “August 2018 Notes”) bearing interest at a rate
of 6% per annum. As part of the August 2018 Notes, the Company’s management and Board of Directors purchased August 2018
Notes with a principal amount of $1,185,000.
The August 2018 Notes are
convertible, in whole or in part, at any time, at the option of the Purchasers, into shares of the Company’s Common
Stock, in an amount determined by dividing the principal amount of each August 2018 Note, together with any and all accrued
and unpaid interest, by the conversion price of $2.50. The Company has the right to require the Purchasers to convert all or
any part of their August 2018 Notes into shares of its Common Stock at a conversion price of $2.50 if the price of the Common
Stock remains at a closing price of $3.50 or more for a period of twenty consecutive trading days.
Upon any Change in Control (as
defined in the August 2018 Notes), the Purchasers have the right to require the Company to redeem the August 2018 Notes, in
whole or in part, at a redemption price equal to such August 2018 Notes’ outstanding principal balance plus accrued
interest.
The August 2018 Notes contain certain events
of default that are customarily included in financing of this nature. If an event of default occurs, the Purchasers may require
the Company to redeem the August 2018 Notes, in whole or in part, at a redemption price equal to such notes’ outstanding
principal balance plus accrued interest.
The August 2018 Notes bear interest at
the rate of 6% per annum, payable semi-annually in cash or in kind, at the Company’s option, and are due and payable in full
on August 30, 2021. Until the principal and accrued but unpaid interest under the August 2018 Notes is paid in full, or converted
into shares of Common Stock pursuant to their terms, the Company’s obligations under the August 2018 Notes will be secured
by a lien on substantially all assets of the Company (excluding certain cash accounts) and the assets of APDN (B.V.I.) Inc.
The Company has also entered into a registration
rights agreement, dated as of the date of the Purchase Agreement, with the Purchasers, pursuant to which it has agreed to prepare
and file a registration statement with the SEC to register under the Securities Act of 1933, as amended (the “Securities
Act”) resales from time to time of the Common Stock issued or issuable upon conversion or redemption of the August 2018 Notes.
The Company is required to file a registration statement within 60 days of receiving a demand registration request from holders
of a majority of the outstanding principal balance of the August 2018 Notes, and to cause the registration statement to be declared
effective within 45 days (or 90 days if the registration statement is reviewed by the SEC).
On November 29, 2018, the Company closed
a securities purchase agreement with its chairman, president and chief executive officer and one member of the management team,
pursuant to which the Company issued and sold an aggregate of $550,000 in principal amount of secured convertible notes bearing
interest at a rate of 6% per annum (the “November 2018 Notes”). The November 2018 Notes are substantially similar to
the Company’s August 2018 Notes except with respect to maturity date, which is November 28, 2021 The November 2018 Notes
are secured on a
pari passu
basis with the same Company assets as the August 2018 Notes.
On July 17, 2019, the Company closed
$1.5 million in gross proceeds in July 2019 Notes, bearing interest at a rate
of 6% per annum, in a non-brokered private placement with an accredited investor, Dillon Hill Capital, LLC (“Dillon
Hill”) and simultaneously amended the terms of the Existing Notes and, (together with the July 2019 Notes, the “Company Notes”) to, among other
amendments, (i) reduce the conversion price of the Existing Notes to $0.54 to facilitate their conversion into equity and
(ii) change the maturity date of the August 2018 Notes to be November 28, 2021. Under the terms of the July 2019 Notes, until
October 13, 2019, Dillon Hill has the right to purchase on the same terms as the July 16, 2019 sale up to an
additional $500,000 in principal amount of the July 2019 Notes, and up to an additional $1 million in principal amount of the
July 2019 Notes if approved by the Company. In addition, Dillon Hill was granted a right to participate in certain
future financing transactions of the Company (each a “Subsequent Financing”) until July 16, 2020 equal to the
amount required for Dillon Hill to maintain its pro rata ownership of the Company as if the July 2019 Notes had been fully
converted into Common Stock. Until October 13, 2019, Dillon Hill shall have the right to participate in full for the first $1
million of such Subsequent Financing.
After giving effect to the amendments
to the Existing Notes, the July 2019 Notes are substantially similar to the Existing Notes. The July 2019 Notes are secured
on a
pari passu
basis with the same Company assets as the Existing Notes. In addition, on July 19, 2019, the Company
also amended the security agreements dated as of October 19, 2018, to among other amendments, exclude 20% of
the Company’s equity interest in LRx from the assets securing the Company Notes. The July 2019 Notes are convertible,
in whole or in part, at any time, at the option of Dillon Hill, into shares of Common Stock, in an amount determined by
dividing the principal amount of the July 2019 Notes, together with any and all accrued and unpaid interest, by the
conversion price of $0.54 (the “Conversion Price”). The July 2019 Notes are due and payable in full on November
28, 2021.
On or before September 30, 2019, the Company
shall have the right to prepay all or a portion of the July 2019 Notes. If the Company exercises such option, Dillon Hill has the
option to (i) convert all or any part of the July 2019 Notes into shares of Common Stock at the Conversion Price or (ii) redeem
the July 2019 Notes at a redemption price equal to the outstanding principal balance plus accrued interest of the July 2019 Notes
and be issued warrants equal in amount to 40% of the shares of Common Stock that Dillon Hill would have received had it elected
to convert its July 2019 Note into shares of Common Stock. Such warrants, if any, would have an exercise price equal to 105% of
the Conversion Price. Further, the Company has the right to require Dillon Hill to convert all or any part of their Notes into
shares of the Company’s Common Stock at the Conversion Price if the price of the Common Stock remains at a closing price
of $3.50 or more for a period of twenty consecutive trading days.
The July 2019 Notes and the
Existing Notes, after giving effect to the amendments to the Existing Notes, contain certain negative covenants that restrict
the Company, including prohibitions or limitations, among other things, on the incurrence of additional indebtedness,
subsidiary asset sales, intercompany loans, liens, amendments to the Company’s organization documents, dividends, and
redemptions without consent of the Required Holders (as defined in the Company Notes).
The July 2019 Notes contain certain events
of default that are customarily included in financings of this nature. If an event of default occurs, Dillon Hill (by an affirmative
vote of the holders of the Company Notes representing at least 30% of the aggregate principal amount of the Company Notes then
outstanding) may require the Company to redeem the July 2019 Notes, in whole or in part, at a redemption price equal to the greater
of (i) their outstanding principal balance, plus all accrued and unpaid interest, divided by the Conversion Price, multiplied by
the volume-weighted average price (VWAP) on the date the redemption price is either (x) demanded or otherwise due or (y) paid in
full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal, plus all accrued and unpaid interest.
The Company expects to use the net proceeds
for general corporate purposes.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE E- SECURED CONVERTIBLE NOTES PAYABLE
(continued)
The Company recorded $64,848 to debt issuance
costs based on the cost incurred to complete the financing. During the three and nine month period ended June 30, 2019 the Company
amortized $4,826 and $13,947, respectively, of debt issuance costs resulting in unamortized debt issuance costs of $49,422 and
the secured notes payable of $2,265,090 at June 30, 2019. The debt issuance cost will be amortized over the life of the Company
Notes. During the three and nine month periods ended June 30, 2019, the Company incurred $33,351 and $94,745 of interest expense.
The effective interest for the three and nine month period ended June 30, 2019 was 7.0%.
On February 28, 2019 and May 29, 2019,
the Company reclassified $48,816 and $16,274, respectively from accrued liabilities to senior secured notes payable to represent
interest due to noteholders that was paid in kind and therefore increasing the convertible note balance outstanding at June 30,
2019.
NOTE F — CAPITAL STOCK
On December 21, 2018, the Company entered
into an underwriting agreement (the “Agreement”) with Maxim Group LLC (“Maxim”), as the sole underwriter
and book running manager, with respect to the issuance and sale of an aggregate of 5,500,000 shares (the “Shares”)
of Common Stock, together with warrants to purchase an aggregate of 5,500,000 shares of Common Stock (the “Warrants”)
at an exercise price equal to $0.50 per share of Common Stock (the “Exercise Price”) in an underwritten public offering.
The public offering price for each Share together with the accompanying Warrant was $0.50. Pursuant to the Agreement, the Company
also granted Maxim a 45-day option to purchase an additional 825,000 Shares and/or additional Warrants to purchase 825,000 Shares
to cover any over-allotments made by the underwriters in the sale and distribution of the Shares and Warrants. The gross proceeds
of the offering, before deducting underwriter discounts and commissions and other offering expenses, are $2,750,000, or approximately
$3,162,500 if the underwriters exercise in full their overallotment option. The offering closed on December 26, 2018. On December
26, 2018, Maxim partially exercised its overallotment option and purchased an additional 800,000 Warrants at a price of $0.0000001
per Warrant.
After deducting underwriting fees and other
expenses related to the offering, the aggregate net proceeds were approximately $2,262,000.
The Warrants are immediately exercisable
beginning on the date of issuance (the “Initial Exercise Date”). The Warrants will be exercisable for five years from
the Initial Exercise Date, but not thereafter.
The Warrants include an adjustment provision
that, subject to certain exceptions, reduces their exercise price if the Company issues Common Stock or Common Stock equivalents
at a price lower than the then-current exercise price of the Warrants, subject to a minimum exercise price of $0.14 per share.
The exercise price and number of the shares of the Company’s Common Stock issuable upon the exercise of the Warrants will
be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization
or similar transaction, as described therein. In addition, on or after any trading day 75 days after the closing date of the offering,
if the daily volume weighted average price of the Company’s Common Stock fails to exceed the Exercise Price, the aggregate
number of warrant shares issuable in a cashless exercise shall equal the product of (i) the aggregate number of warrant shares
that would be issuable upon exercise of the Warrants if such exercise were by means of a cash exercise and (ii) 0.70.
Subsequent to June 30, 2019, as a
result of the Company’s stock price falling below $0.50, 4,721,000 warrants have been cashlessly exercised. These
exercises resulted in the issuance of 3,318,701 shares of the Company’s Common Stock.
As a result of this financing, the exercise
price of the 2,735,000 warrants issued during December 2017 was reduced to an exercise price of $0.44 per share in accordance with
the adjustment provision contained in the warrant agreement. The incremental change in fair value of these warrants as a result
of the triggering event was insignificant.
On January 25, 2019, the Company closed
on the underwriters’ partial exercise of its over-allotment option for 500,000 shares of Common Stock for gross proceeds
of $250,000. After deducting underwriting fees and other expenses related to the over-allotment option, the aggregate net proceeds
were approximately $201,000.
The total number of Common Stock and Warrants
issued under this offering, including the exercise of the over-allotment option was 6,000,000 and 6,300,000, respectively. The
gross proceeds to us were $3.0 million and net proceeds after deducting underwriting expenses and other estimated offering expenses
was approximately $2.5 million.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE G — STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes
in warrants outstanding. These warrants were granted in lieu of cash compensation for services performed or financing expenses
in connection with the sales of the Company’s Common Stock.
Transactions involving warrants (see Note
F) are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Balance at October 1, 2018
|
|
|
12,208,527
|
|
|
$
|
3.24
|
|
Granted
|
|
|
9,035,000
|
|
|
|
0.48
|
|
Exercised
|
|
|
(2,215,000
|
)
|
|
|
0.45
|
|
Cancelled or expired
|
|
|
(2,735,000
|
)
|
|
|
3.00
|
|
Balance at June 30, 2019
|
|
|
16,293,527
|
|
|
$
|
2.30
|
|
Stock Options
In 2005, the Board of Directors and the
holders of a majority of the outstanding shares of Common Stock approved the 2005 Incentive Stock Plan, as amended and restated
as of January 21, 2015 (the “Incentive Plan”). On March 27, 2019, the Board of Directors approved an amendment to the
Incentive Plan, which was approved by shareholders on May 16, 2019. The amendment increases the number of shares of Common Stock
that can be issued as stock awards and stock options thereunder from an aggregate of 8,333,333 to an aggregate of 14,333,333. The
number of shares of Common Stock that can be covered by awards made to any participant in any calendar year is 833,334 shares.
The Incentive Plan’s expiration date is January 25, 2025.
The Incentive Plan is designed to retain
directors, executives, and selected employees and consultants by rewarding them for making contributions to the Company's success
with an award of options to purchase shares of Common Stock. As of June 30, 2019, a total of 275,752 shares have been issued and
options to purchase 8,450,764 shares have been granted under the Incentive Plan.
Transactions involving stock options issued
to employees and consultants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted Average
Contractual Life (Years)
|
|
Outstanding at October 1, 2018
|
|
|
6,183,214
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,134,878
|
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(1,388,646
|
)
|
|
|
(5.39
|
)
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
7,929,446
|
|
|
$
|
2.51
|
|
|
|
|
|
|
|
7.08
|
|
Vested at June 30, 2019
|
|
|
6,409,862
|
|
|
$
|
2.94
|
|
|
$
|
-
|
|
|
|
6.45
|
|
Non-vested at June 30, 2019
|
|
|
1,519,584
|
|
|
$
|
0.68
|
|
|
$
|
-
|
|
|
|
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE G — STOCK OPTIONS AND WARRANTS
(continued)
The Company uses the Black Scholes Option
Pricing Model to determine the fair value of options granted. The following significant weighted average assumptions in the Black
Scholes Option Pricing Model were utilized to estimate the fair value of share based payment awards during the nine month periods
ended June 30, 2019 and 2018:
|
|
Nine Month Period
Ended
June 30, 2019
|
|
|
Nine Month Period
Ended
June 30, 2018
|
|
Stock price
|
|
$
|
0.87
|
|
|
$
|
1.57
|
|
Exercise price
|
|
$
|
2.55
|
|
|
$
|
1.57
|
|
Expected term, years
|
|
|
4.30
|
|
|
|
5.35
|
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Volatility
|
|
|
89
|
%
|
|
|
94
|
%
|
Risk free rate
|
|
|
2.0
|
%
|
|
|
2.6
|
%
|
The Company recorded an expense of
$154,304 and $238,738 as stock compensation for the three month periods ended June 30, 2019 and 2018, respectively which are
recorded in selling, general and administrative expenses in the condensed consolidated statement of operations. The Company
recorded expense of $911,642 and $184,806 as stock compensation for the nine month periods ended June 30, 2019 and 2018,
respectively. As of June 30, 2019, unrecorded compensation cost related to non-vested awards was $637,673, which is
expected to be recognized over a weighted average period of approximately 0.84 years. The weighted average grant date fair
value per share for options granted during the nine month period ended June 30, 2019 was $0.32. The range of expected
volatilities used to calculate the fair value of actions granted during the nine months ended June 30, 2019 was 64% to 145%.
NOTE H — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under
an operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building.
The term of the lease commenced on June 15, 2013 and expired on May 31, 2016, with the option to extend the lease for two
additional three-year periods. The Company has exercised its option to extend the lease for one additional three-year period
ending May 31, 2019. This lease has been extended until September 15, 2019. The base rent during the additional
three-year period is $458,098 per annum. In addition to the office space, the Company also has 1,500 square feet of
laboratory space. The term of the lease commenced on November 1, 2015 and expired on October 31, 2018. Effective November 20,
2017, the Company renewed this lease for one additional year, ending October 31, 2018. This lease is currently month to
month. The Company set up a satellite testing facility in Ahmedabad, India during fiscal 2018. On November 17, 2017, it
leased 1,108 square feet for a three-year term beginning November 1, 2017. The base rent is approximately $6,500 per
annum.
Total rent expense for the three and nine
month periods ended June 30, 2019 were $129,250 and $387,672, respectively. Total rent expense for the three and nine month periods
ended June 30, 2018 were $129,310 and $400,603, respectively.
Employment Agreement
The
Company has an employment agreement with Dr. James Hayward, its Chief Executive Officer (“CEO”) effective July 1, 2016.
The initial term was through June 30, 2017, with automatic one-year renewal periods.
As of June 30, 2018, the employment
contract renewed for an additional year.
Under the agreement, the CEO will be eligible
for a special cash incentive bonus of up to $800,000, $300,000 of which will be payable if and when annual revenue reaches $8 million
and $100,000 of which would be payable for each $2 million of annual revenue in excess of $8 million. The CEO's annual base
salary as of June 30, 2019 under the agreement (including voluntary salary reductions) is currently $250,000.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE H — COMMITMENTS AND CONTINGENCIES
(continued)
Effective March 15, 2018, the Compensation
Committee of the Company’s Board of Directors, approved a bonus of $121,125 that would be payable to the CEO when the Company
reaches $3,000,000 in revenues for two consecutive quarters or $12,000,000 in revenues for a fiscal year, provided that the CEO
is still employed by the Company on such date (the “Revenue Bonus”).
Effective May 2, 2018, the Compensation
Committee of the Company’s Board of Directors, increased the amount of the Revenue Bonus to $403,623. Effective December
27, 2018, the compensation committee approved an additional bonus opportunity of $150,000 for the calendar year-ended December
31, 2019 that would be payable to the CEO under the same terms as described above.
The accrual for the Revenue Bonus of $552,779
is recorded to long term accrued liabilities on the balance sheet as of June 30, 2019.
Litigation
From time to time, the Company may become
involved in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of
a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the
amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated
loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. Litigation
is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm
the Company’s business. There is no pending litigation involving the Company at this time.
NOTE I– GEOGRAPHIC AREA INFORMATION
Net revenues by geographic location of
customers are as follows:
Three Month Period Ended June 30,
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
580,255
|
|
|
$
|
574,805
|
|
Europe
|
|
|
117,713
|
|
|
|
228,414
|
|
Asia and other
|
|
|
1,355,489
|
|
|
|
213,136
|
|
Total
|
|
$
|
2,053,457
|
|
|
$
|
1,016,355
|
|
Nine Month Period Ended June 30,
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
1,482,496
|
|
|
$
|
1,204,025
|
|
Europe
|
|
|
490,073
|
|
|
|
799,003
|
|
Asia and other
|
|
|
1,743,678
|
|
|
|
704,950
|
|
Total
|
|
$
|
3,716,247
|
|
|
$
|
2,707,978
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2019
(unaudited)
NOTE J– SUBSEQUENT EVENTS
Non-binding Term Sheet with TheraCann
International Benchmark Corporation
On August 5th, 2019, the
Company signed a non-binding term sheet (the “Term Sheet”) with TheraCann International Benchmark
Corporation (“TheraCann”) outlining agreed-upon amendments to the exclusive Patent and Know-How License and
Cooperation Agreement signed March 28, 2019 between TheraCann’s wholly-owned subsidiary ETCH BioTrace S.A.
(“ETCH”), the Company and our wholly-owned subsidiary APDN (B.V.I.) Inc. (the “TheraCann Agreement”).
The Term Sheet is expected to be followed by definitive contractual amendments. Under the Term Sheet, the parties agreed to
amend the TheraCann Agreement to provide the Company with $4,000,000 in TheraCann convertible preferred stock with an annual
fixed-rate dividend yield of 10%, compounding quarterly and a two year $1,000,000 convertible promissory note guaranteed by
all of TheraCann’s operating subsidiaries, in exchange for the Company’s waiver of $4,000,000 in cash payments
due from TheraCannETCH on or before August 15, 2019. At the option of the Company, the convertible preferred stock can be
either (i) converted into shares of TheraCann’s common stock or (ii) redeemed for cash upon the occurrence of a full
redemption/conversion event. A full redemption /conversion event means either (i) the consummation of the Initial Public
Offering (“IPO”) of TheraCann, (ii) a private placement of more than $8,000,000 of TheraCann equity or (iii) the
full redemption/conversion date. The convertible promissory note will, at the Company’s option, be convertible at any
time and will automatically convert into TheraCann’s common stock upon the consummation of the IPO of TheraCann if the
IPO price per share is greater than the conversion price per share. The full redemption/conversion price will be based upon a
third-party valuation.
Asset Purchase Agreement
On August 6, 2019, LRx entered into an
Asset Purchase Agreement (the “Asset Purchase Agreement”) with Vitatex, Inc. (“Vitatex”), a private biotechnology
company focused on advancing personalized medicine with a solution that isolates Invasive Circulating Tumor Cells (iCTCs) from
standard patient blood samples. The Asset Purchase Agreement provides for the purchase of substantially all of the assets
(“Assets”) of Vitatex. The Company completed the acquisition of such Assets on August 7, 2019 (“Vitatex Asset
Acquisition”). The Vitatex Assets, include physical assets, such as laboratory equipment, as well as registered and other
intellectual property. The Assets also include Vitatex’s rights under a patent license agreement (the “License Agreement”)
between The Research Foundation for the State University of New York (the “Research Foundation”) and Vitatex. The purchase
price for the Assets consists of $500,000 in cash and common stock of LRx and up to an additional $500,000 of LRx common stock
as performance-based contingent consideration, which was determined through arms-length negotiation. Of this amount, (i) an initial
payment of $300,000 was paid to the existing shareholders of Vitatex at closing using the common stock of LRx (ii) $100,000 in
cash must be paid to Vitatex on or before September 30, 2019 and (iii) $100,000 in cash must be paid to Vitatex on or before December
31, 2019. The Research Foundation received cash instead of shares of LRx at closing. On August 7, 2019, LRx paid approximately
$11,710 to the Research Foundation to pay off and satisfy Vitatex’s outstanding cash and/or equity obligations owed to the
Research Foundation, thereby reducing the cash payment due to Vitatex on or before September 30, 2019 to approximately $88,290.
In addition, the shareholders of Vitatex are also entitled to additional performance-based equity distributions of up to $500,000
in shares of common stock of LRx (based on the then-current market capitalization of LRx) with (i) $250,000 of LRx common stock
becoming due upon the occurrence of LRx completing the National Cancer Institute Small Business Innovation Research (NIC SBIR)
program filings due on or before August 9, 2019 or the next SBIR program filings due on September 5, 2019, (ii) $100,000 of LRx
common stock becoming due if the Assets yield more than $100,000 in gross revenue by July 29, 2020 and (iii) $150,000 of LRx common
stock becoming due if the Assets yield an additional $200,000 in gross revenue. The Research Foundation will receive cash instead
of shares of LRx upon the completion of any such performance-based events. . Dr. Wen-Tien Chen, the founder of Vitatex, also entered
into a consulting agreement with LRx for a term of twelve (12) months subject to earlier termination by either party upon thirty
(30) days’ notice.